In this episode, Bobby Ong, co-founder of CoinGecko is joined by Yenwen Feng, Co-Founder at Perpetual Protocol. Bobby interviewed Yenwen on the background of Perpetual Protocol, changes on Perpetual Protocol V2, as well as Perpetual Protocol’s upcoming plans for 2021.
[00:02:07] What does Perpetual Protocol do?
[00:05:13] Difference between Perpetual Protocol V1 and Perpetual Protocol V2
[00:13:42] Changes in Perpetual Protocol V2
[00:18:46] Maximum leverage one can trade on Perpetual Protocol V2
[00:21:49] What happens when users get liquidated on Perpetual Protocol?
[00:27:15] Why Perpetual Protocol chose xDAI for V1 and Arbitrum for V2?
[00:30:06] Trading fees distribution for PERP token holders
[00:33:47] Upcoming plans for Perpetual Protocol
[00:36:29] Can decentralized derivative platforms compete with centralized derivative platforms?
Quotes from the episode:
“We actually kind of have a discussion within the Perpetual Protocol community, that we want to increase it to like 15X or like 20X. But actually the community doesn't want that. They feel that people can just rug.” [00:19:14]
“If you want to do 10X, you have to make sure, so our max leverage is 10X. But we do have a buffer, so the max you can go is like 16X. But once you go over that, we will start liquidating your position. We have partial liquidation, so we will take over one fourth.” [00:23:00]
“I think for V2, we talk about wanting to swap out the x*y=k and then use Uni V3, that's definitely one thing. And then we also want to implement other things like cross margin.” [00:34:03]
Watch the Podcast on YouTube
Perpetual Protocol - https://perp.exchange/
CoinGecko - https://www.coingecko.com/
Perpetual Protocol (PERP) on CoinGecko -https://www.coingecko.com/en/coins/perpetual-protocol
Bobby Ong [00:00:00]:
Welcome to the CoinGecko podcast. I'm your host, Bobby Ong. Each week we will be interviewing someone from the blockchain industry to learn more about this fast moving cryptocurrency economy. If this is your first time listening, then thanks for coming. The CoinGecko podcast is produced each week to help you stay ahead of the curve. Shownotes can be found at podcast.coingecko.com. I highly encourage you to join our newsletter where we send out top news in the crypto industry every Monday to Friday. Come back often and feel free to add the podcast to your favorite RSS feed or iTunes. You can also follow us on Twitter and Telegram at CoinGecko.
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Bobby Ong [00:01:43]:
Hey guys, welcome to the CoinGecko podcast. My name is Bobby. I'm the co-founder and COO at CoinGecko. For today's episode, we have Yenwen Feng, co-founder at Perpetual Protocol. If you're watching this on YouTube we at CoinGecko would really appreciate it if you hit the subscribe button below and yeah very happy to have you on the show Yenwen.
Yenwen Feng [00:02:03]:
Yeah. Thanks for having me. Yeah, it's great honor to be on this show.
Bobby Ong [00:02:07]:
Yeah, I think to start things off right, Yenwen maybe can you give us a simple explanation of what Perpetual Protocol does?
Yenwen Feng [00:02:14]:
Sure, of course. So we at Perpetual Protocol, we are building a decentralized perpetual contract protocol, which means that you can check perpetual swap on top of Perpetual Protocol. You can think this is kind of a Uniswap meets BitMEX. So perpetual contracts invented by BitMEX and we kind of add an AMM on top of that. So you kind of have all the good characteristics of AMM, like Uniswap. You can trade anytime you want, you can ignore the slippage. The kind of like, I mean, like there are liquidity there that you are sure that pull away by market maker. So I think that's actually what Perpetual Protocol is.
Bobby Ong [00:02:54]:
Yeah. So tldr is Perpetual Protocol in my understanding is like a decentralized version of BitMEX, which has the most popular contract in crypto called the perpetual swap contract, right. So before we get deeper into these decentralized versus centralized conversation like, share with us what do you think are the main benefits of using perpetual swap contract, of trading this perpetual swap contract compared to just trading the margin trading on one of the exchanges. Like you can kind of margin trade 5X, for example, but why would you want to use perpetual swap, for example?
Yenwen Feng [00:03:26]:
Yeah, that's a good question. So actually I think it's, if we go back and then look at also BitMEX, actually, I mean, they kind of like have this idea, I mean in the early days of crypto. So why they have this idea that lead to create a perpetual contract is that they, I mean, at that time there is no stable coin. I mean, there are only like Bitcoin and a few other coins. So if they want to trade I mean, I kind of a trade other assets, I mean perpetual contract. The good thing about perpetual contract is that you don't really need underlying. So you don't really need a lots of, I mean like margin shaking, if you want to have margin trading you, the first thing is that you must have like ETH or other tokens on your platform first. So you can kind of add any kind of arb the traders and then they can do the multi trading. But perpetual contract you don't. So people kind of like betting against each other, just like futures. So I think that's actually the main reason that you don't really need underlying asset. So it's more flexible. So like we can also do like asset that doesn't have on-chain property. So like oil futures or something like that. So you don't really need that token. So I think that's the benefit. And the second thing definitely is the capital efficiency. Because you don't really need underlying tokens. So, you know, there is no cap on the, I mean on open interest. So, you know, you can have as many contracts as you want. So I think that's also increase the capital efficiency. So I think that's the two main reasons.
Bobby Ong [00:05:07]:
Cool. You guys just launched your Version 2 of Perpetual Protocol. Congratulations on that, first of all.
Yenwen Feng [00:05:13]:
Bobby Ong [00:05:13]:
So I guess my question would be what would be the main difference between Perpetual Protocol Version 1 and Perpetual Protocol Version 2?
Yenwen Feng [00:05:23]:
Yeah. So if you look at Perpetual Protocol V1, so far we have a V1 inside. We actually have kind of like two components. So one thing is that we have this ability to take in capital like USDC and then mint virtual token. So we can mint virtual ETH, virtual USDC, and then the second part is that we have this x*y=k motto, just like Uni V2. So I mean, traders can place virtual ETH on top of the V2. So we use the x*y=k model. The kind of like the pricing engine for the whole perpetual contract pricing. So that's what we did V1. So that's how this works. And in V2, we actually taking the x*y=k out. We are not using the x*y=k model anymore. And then we hung out with Uniswap V3. So Uniswap V3, they launched like in May that you know, they have this like new really exciting that the LP complex model that, I mean, like the liquidity provider can actually provide liquidity within a certain range, so they can kind of express themselves, their view to the market using that model. So we plug the Uni V3 in then and then the hostess are actually can become more capital efficient because of Uni V3, but we scale, I mean, have this like ability to mint more token to provide leverage. So I think that's the major change of Perp V2 and of course, I mean, the benefit is that we get the concentrated liquidity straight from the Uni V3. So LP or Maker, they can place like limit order, right now. So, you know, we cannot do limit order before, so definitely they can do limit order so they can concentrate liquidity. I mean, they can implement market making strategy, like the traditional market maker. It will be like but of course they are kind of like the details that's different. So definitely that's the major, like benefit we get.
Bobby Ong [00:07:29]:
So I think, I know you kind of brought up a lot of new concepts and other things like a lot of new concepts from Perpetual Protocol V1 and Perpetual Protocol V2. But let me, let me try to break it down a little bit some of these concepts that you brought up. So, the Perp Protocol V1 uses the constant product market maker, which is the x*y=k formula used by Uniswap V2 and also SushiSwap and so on. This is kind of the model, this is a bonding curve where liquidity providers contribute 50% for both tokens. For example, ETH and USDT into a bonding curve, and then the price sort of move according to these bonding curve, right? But then you brought up this concept of a virtual AMM, a virtual Automated Market Maker. So I guess before we dive deeper into all these other concepts, like let's just get to the basics again, how does a virtual AMM work with respect, so like Perpetual Protocol V1 uses the virtual AMM. And how does this compare against the normal x*y=k constant product market maker on Uniswap? There is some difference in both, right?
Yenwen Feng [00:08:33]:
Yes. Yeah. That's a good question. So, Perp V1, I think, yeah, the virtual AAM is kind of our, like unique design. So like I said we are actually using the same mechanism, like Uniswap. So x*y=k everyone kind of like know that. And the question is that because we are doing this perpetual contract, we need to provide leverage. And also the same thing that we talk about, we don't really have the underlying token. We are not really supplying ETH, we're not supplying other token, UNI token, or 1inch token into the AMM. So we need to have these mechanics and that means virtual token. So that's the first part, we have this minting, and then we have to control the leverage, we have to make sure we liquidate, the trader at the right time. So that's one part. The second part about virtual AMM is that it's actually quite interesting that the virtual AMM side doesn't have counterparty. So in a traditional Uniswap like x*y=k model, there is counter party. Counterparty is a liquidity provider. A liquidity provider provides liquidity to the system and then they earn the fees, but at the same time they have implement loss. Because it kind of like take the other side of the trade. But in Perp V1 that or virtual AMM, we don't really have, liquidity provider. That's actually quite interesting because we found the characteristic of this like, hey, that we can actually take out. If everything we mint is virtual, we can actually kind of like we can control the supply of those tokens. We can actually take part of the liquidity provider and then kind of like that the virtual AMM as a middleman. So traders kind of trade against themselves. So like Abby has put, you know, take a long position and then like Bob pick another long position once. Abby is you know, withdraw, you know, kind of like cash out. Actually Bob will kind of become Abby's counterparty. So I think that's how it's like that's pretty unique, I think in the space. So that, but still I mean, like, it has like some issue or risk within this model, but that's how the V1 work.
Bobby Ong [00:10:48]:
Somebody must provide the initial liquidity to the system, right? So you, I guess in Perp V1 you accept USDC as your collateral, I suppose, is that the correct way? So, and then once you put in collateral, you get the amount of money that you can sort of trade on Perp V1 and the amount of collateral it put up sort of backs the entire solvency of the Perp V1 as well, right? And it's interesting because there is no, like centralized exchanges you sort of, when you buy a contract, they must be a seller somewhere, so someone making a profit somewhere must mean someone making a loss as a zero sum game. How does it work for the Perp V1? So if I let's say I make like a $1 million profit on the trade that means the system as a whole has suffered a million dollars lost. I mean, there is no counterparty so that the losses are socialized among all traders. And is there a possibility that like some, one trader make a super massive gain and kind of bankrupt the entire Perp V1 system?
Yenwen Feng [00:11:46]:
Yeah, that's a really good question. So the first thing is that like there might be like one trader who, I mean, that wins a lot of money. But he will not bankrupt the whole system because I mean, mathematically it's kind of like a pool. So if you think about, this if we start when eth is like a hundred dollars. we create this AMM and then, so they are like 10 traders coming in and then each one takes a long position. So because of this x*y=k, so everyone takes long position, the price actually goes up. So you can see that there are 10 traders so the price goes up by 10 times. And then if they all sell their position after, I mean, just by the same order, then the price actually goes back to the usual price. I think that's actually pretty easy to understand. But this actually kind of like demonstrate the, I mean, the question you asked. So the trader actually trade against each other. So people, I mean, like, you know, I take the long position, the price goes up. if I close it right now, I actually have no profit, but if another person come in and then they, he or she also takes the home position then actually, if I close my position, now I got some profit and then the other guy actually take a loss. So it's actually controlled like that. So I think that's...
Bobby Ong [00:13:06]:
So I kind of see how the system works because so you trade against the bonding curve and against the other traders. So you come in later, you buy at a higher price, but it also means that the price that is available for a trader to buy or sell on Perpetual Protocol may not be exactly the exact spot market price on, say on Binance or Coinbase, for example, right. Because of this virtual AMM feature. Am I right to say that?
Yes, you're right. But also, I think that's the same as like, BitMEX or FTX. I mean, yeah, most of the perpetual market rolls like this.
Bobby Ong [00:13:41]:
And, so how does this change when it comes to Perp V2, right? So I know you kind of take the Uniswap V3 model and then which has concentrated liquidity and chain. So like now, if I would like to provide liquidity on to Perp V2, do I still put in only USDC or do I have to kind of put in two tokens into the model and set the range where I would like to provide liquidity.
Yenwen Feng [00:14:04]:
Yeah, that's a good question. So for V2, we are still using USDC. You only put in USDC. So I think that's the major difference between the LP in Uniswap and Perpetual Protocol. So we can USDC and the maker or the liquidity provider, they can, you know, make a decision that if they want to mint virtual ETH, virtual Uniswap, virtual UNI token or virtual USDC, you know, like for example I want to provide liquidity by like USDC, so I can put in a hundred USDC and then I can make a decision to that, you know, how much leverage I want to take. If I want to take a 5X, then I can mint 500 USDC or 500 USDC worth of wrapped ETH. And then I have these virtual tokens, and then I can see which range I want to put on the ETH market on the Perpetual Protocol.
Bobby Ong [00:14:59]:
So, I guess the steps involved with V2 will be the first step is deposit USDC into Perp, Perpetual V2, and then I have to decide like how much leverage I would like to take and then mint the virtual USDC and virtual ETH. And then let's say I put $200. A hundred dollars I can mint at 5X leverage, 500 USDC and $500 worth of ETH. And then I can kind of take both of these virtual tokens and kind of like add to the liquidity of Perp V2 at a certain range, let's say like between 1,750 USDC per ETH, up to 2,500 ETH for example. And I can kind of set that range, I suppose.
Yenwen Feng [00:15:37]:
Yes. Yes. Yep. 100%. Yep.
Bobby Ong [00:15:41]:
Cool. And, so I've got an interesting question to you, right? As a liquidity provider do you think I will make more fees on Uni V3 or do you think I will make more fees, LP fees on Perp V2?
Yenwen Feng [00:15:56]:
Yeah, that's that's a really interesting question. Okay, so if we take a look at the fees itself, so let's suppose like the ETH market, and then we have this ETH perpetual market and then you are looking at ETH-USDC on Uni V3, the first thing is at Uni V3, you can pick the fee ratio. So like they have like 0.05% or 0.3%, and then 1%. They say that we use the 0.3%. That's most commonly used one. So you provide liquidity there. Perpetual Protocol, the first thing is that we charge 0.1% of the fee, so the fee are less. But because I mean, we have leverage. So if you only look at the fee-wise, if you, suppose [inaudible]. Then if you use more than 3X leverage, then you should get, I mean, if you use like 5X, then you should get more fees than Uniswap.
Bobby Ong [00:16:53]:
Assuming the volume is equal on both Uni and...
Yenwen Feng [00:16:58]:
Yeah. So that's the best thing about fees. Yes. We might generate more fees, but of course it comes with risk. On Uniswap there is impermanent loss risk. So it depends on the region that you, I mean, the liquidity provide like in the region. I mean, how wide that region is or like that range is. You actually, you suffer from impermanent loss. So you have to do a lots of speculation there. For us, we don't have impermanent loss because you only supply like USDC, you mean virtual ETH, right? So yeah it kind of like doesn't have impermanent loss, but you do own long or short position. So, you know, if you put in I mean like the USDC there, you kind of like want to take, I mean, kind of a short position there. So if you want to provide liquidity on our platform, you have to, kind of I think it's more like traditional market making. So you have to make sure the long and short position is kind of at balance in your account. So of course they are different like strategy. I mean, there are lots of different strategy for the market maker on like centralized exchange, but I think that knowledge can be brought up to, I mean, Prepetual Protocol, but I think that's, the risks you are facing are different.
Bobby Ong [00:18:10]:
Yeah. I kind of miss the days when being a market maker in DeFi was so simple. You just take two tokens and just put into Uniswap V2, and you know, and just pray that you don't get hit badly by impermanent loss but now with Uni V3 and then all these things, there's so many more strategies involved and so much more complexity involved when it comes to market making. Gotta think about, IL. Impermanent loss is a complex topic by itself, but now you have all these other things that you have to worry about. So yeah, talking about leverage, right, you mentioned how, if you put 3X leverage, you can kind of get the same amount of fees on Uni V3. So assuming the volumes are the same. What is the maximum leverage that one can trade, can go long or can go short on Perp v2?
Yenwen Feng [00:18:54]:
It's still 10X. So we have a cap leverage on 10X. The reason behind this is that we, I mean of course the blockchain fee is kind of an issue that how fast we can react. But actually the major reason that we are fixed at 10X for the whole time is because the community doesn't want to increase. So we actually kind of like have a discussion within the Perpetual Protocol community that we want to increase it to like 15X or like 20X. But actually the community doesn't want that. They feel that people just can rug. As a, I mean, like you know, software provider, you know, we were okay with the 10X, 20X, or like more. I think of all these like new Layer 2 solutions that can really enable like very high, like bandwidth for the trading protocols, so I think, instead we should be able to get to 50X or actually at least a bit more, but maybe at least at 50X I think that should be fine. So like 50X or 100X on like Binance is actually is more like for marketing. I mean, you don't really want to use that 100X.
Bobby Ong [00:20:01]:
Yeah. I think it's irresponsible. I mean, I've been saying this for a long time. I think 100X leverage on any of these derivative platform is just, you know, it's just asking users to get rekt. No one in their right mind should be using 100X leverage. It's just, it becomes a casino actually. Like this whole thing is casino. I mean, I find it irresponsible, like all these trading platforms offering 100X. So I'm curious to hear, right, like why do you think your community sort of chose to not offer 100X? I mean, it's kind of like the crypto trading statement, right? I mean, BitMEX offers 100X and everybody wants to kind of do a little bit more. FTX has 101X leverage, Binance Futures has 125X leverage. Why did your community decide not to do like 20X or 15X, for example. Yeah, I'm curious to hear like the reasons, why did they kind of decline it?
Yenwen Feng [00:20:48]:
Yeah. Yeah. I think that's a really good question. Actually I'm kind of like partial when I see the discussion because I felt this is actually easy pass. Like people want more leverage, but actually it's not. I think the main reason is that, you know, the community is mostly by traders. You know, people who are really putting money to trade. So they don't feel they need over maybe like 5X. That's I mean, that's what they have in their mind. So, I mean like you know like Binance or like centralized exchange or maybe me, I mean, we have like more, like, we are on the operator side. We are thinking like, you know, we should provide more features to the users. But again, it's not the case. But they all think this causing an issue. They think that getting the things they want to trade you know, this other like features are more important than cross margin or other things much more important than like increase the debit. So I think that's the difference. Yeah.
Bobby Ong [00:21:46]:
Let's talk about liquidation right, One of the reasons why like BitMEX, Binance Futures, FTX kind of like offer this high leverage. One is marketing, but also they kind of make a lot of money when the user, when the trader gets rekt and get liquidated. Like, I mean, take a look at BitMEX Insurance Fund. I mean, it's called an Insurance Fund, supposedly to protect all the other users, but every time a trader gets liquidated, it gets rekt. Like the insurance fund goes big. I think there's like over 130,000, 150,000 Bitcoin in the fund. Like there's no reason why you really need to maintain such a huge insurance fund. And who really owns the insurance fund? I mean, it's owned by BitMEX so it goes to their P&L at the bottom. So my question is if a user gets rekt, it gets liquidated. How does the user gets liquidated on Perpetual Protocol? Maybe V1 or V2, it doesn't really matter. And what happens when a user gets liquidated? Do they and does any of these remaining funds, for example, goes to the perpetual token holder for example, or there's none?
Yenwen Feng [00:22:45]:
Yeah. That's a good question. We don't actually follow the same design as BitMEX and also FTX and Binance. We do have this insurance fund. Okay. So all the traders maintain constant margin ratio. So i think if you want to do 10X, you have to make sure, so our max leverage is 10X. But we do have a buffer, so the max you can go is like 16X, the one six. But once you go over that, we will start liquidate your position. We have partial liquidation, so we will take over one fourth. I mean, it depends on the situation, but for example we take at one fourth of your position and then we will sell those positions at the market price. So if everything was well, which means that we liquidate the position at the right time. So there, I mean like, because we sell the position, they are like fee. So we took parts of the fees as the penalty to the liquidation and then put that fees into insurance fund and the rest of the fee, we actually give out to the liquidator. So they are people who are running bots, who are competing for liquidation. So that's how it works now. And the insurance fund, just like you said the fees actually put in the insurance fund and then is prepare for the future. Because like when the market like really move like a lot, we might not able to liquidate, I mean, the trader's position in time. Like ETH actually go straight down and then we one could liquidate at the needle but you know, in the end actually the price tank. So at that time we need to pay for the debt. So we use the insurance fund. Like you said this seldom happen. So the insurance fund actually, I mean, it's positive most of the time.
Bobby Ong [00:24:30]:
So, I mean, it's interesting, like how like in crypto, this scam wicks happen really frequently. Like, you know, it just scammed all the way down, or like less than a minute, or like 30 seconds, and then it move back up or just move to the top. And it just kind of on centralized platform, it just wipes up a lot, especially on BitMEX, Binance, it just wipes out. Because there's no partial liquidation on this platform, it just wipes out all these traders. Even though like the price just touches the liquidation point for a fraction of a second. But when it comes to like decentralized platforms like the liquidation engine is all not run by you guys is all run by liquidation bots and all. And then the price has maybe some delay from the Oracles and all. Will traders be affected from this scam wicks going up or going down and they get wiped out as well from partial liquidation, for example?
Yenwen Feng [00:25:18]:
The first thing is that partial liquidation actually prevent this. I mean, lots of time, I personally don't think that the centralized exchange make it like this. I mean, they just want to wipe out all the long or short. I personally don't think that but it happens because I think the first thing, the market maker. So they are using this, all the bots. So market maker, I mean, like they can pull away their liquidity, I mean, inside the vault. So when market actually become like more fluctuate, they just pull the liquidity so you can see that liquidate. I think that's definitely the first thing. The second thing is that the, if you don't have partial liquidation, then you will have like cascading liquidation happens. So once you leave with the one position drop, you know, you kind of like, it will take out parts of the orders and then the price dropped, and then it dropped again. So definitely I think those are the reason. On decentralized platform, the first thing is that we are not really offer that, you know, I mean, the leverage offers 10X. So, it's not really that sensitive that you know, when the price crash, I mean, for 10X, like I said, this is actually 10X, so the price actually has to move maybe, I mean, more than 10%. Then you got liquidated. So, it's not really that, I mean, like, you know, within an hour you have to move like more than 10%. I think that's really hard. So I think that's you know, our platform have used to that. The second thing is that we have partial liquidation, definitely help. And we have this AMM, so I think at least for traders or like liquidity providers, they pull away liquidity and that's really hard. Especially, we don't really have liquidity provider. Yeah. So it's kind of like, you know, we don't have that kind of like a wipeout happened in our platform. But definitely still if you get leverage, you will get liquidated.
Bobby Ong [00:27:07]:
Yea, it's a dangerous place to use leverage. I generally try to avoid cause I've been wiped out so many times as well. On top V1, you guys launch on Ethereum Mainnet and you also deployed it on xDAI. But for Perp V2, you guys chose to deploy on Arbitrum and it's no longer on xDAI I believe. So as a trader, you can kind of trade on the Ethereum Mainnet on Arbitrum. So I'm just curious to hear from your point of view, why do you guys choose xDAI for V1 and then Arbitrum for V2. And how did it end up with these two solutions instead of the other scaling solution? There are so many out there in the market.
Yenwen Feng [00:27:43]:
Yes, yes. Yeah. So we actually put it on ETH Mainnet, but we just pull away from there. So we actually don't really release it. The reason behind this is that we actually, I mean, everything is ready like last September. So we want to launch a token at that time. But at that time, the gas price is like, I remember it's like 500. They say, one day you may release a token, like if it pump up to like a thousand. So, I mean, like it applies to actually open a position costs you like 100 USD.
Bobby Ong [00:28:13]:
Oh, wow. That's expensive.
Yenwen Feng [00:28:14]:
Impossible. I mean like there's, I mean, nowhere on earth that any trader wants to trade, pay a hundred dollar to open a position. So we actually, we could pull it. We found that this is not possible. And then we actually don't really launch it so we just put it there. And then we that last September, we just like go out and try to find, like, Layer 2 solution that we can keep away. So at the time, actually, there are only two choices we have. The one is Matic, which is on top right now, which is very good, I think. Yup. And the other one is xDAI. We picked xDAI because we have one engineer who are more familiar with xDAI and also like xDAI had been running for like more than a year at that, I mean, last September. So it really get been there for awhile and Matic [inaudible] are quite new. Not really quite new. They have these POS new system coming out. That's really interesting, but at the time we just kind of like maybe, you know, go for the safer path. So we use xDAI at that time. And we actually do lots of engineering work and then relaunch everything last December. So yeah, two or probably three months to do everything. Yup. And fast forward right now, I think xDAI actually is working quite well. I mean like the gas fee is really low and I think that the [inaudible] is good. So we have been on there. I mean, we don't really have a major issue on there, but because the Perp V2, we, right now the whole system is depend on Uniswap V3. So we need to go to a place that the Uniswap do deploy. So Uniswap come in to deploy on Arbitrum and also Optimism. Yep. So those are the places we are going to actually like target.
Bobby Ong [00:30:01]:
Cool. You guys also work with Delphi Digital to redistribute the trading fees to PERP token holders. I saw that Stage 1 has already been live and Stage 2 is pending deployment. I guess when is Stage 2 expected to launch and what percentage of revenue from the trading fee that will flow to PERP token stakers.
Yenwen Feng [00:30:20]:
Yeah, that's a good question. Actually, yeah, we kind of struggle at like try to get a good answer. So before talking about these like Stage 2 actually, I want to explain that the virtual AMM, I mean, the risk. So there are like two reasons that we want to build the V2. One thing we talked about a lot is the capital efficiency. So while we want to have a concentrated liquidity one like liquidity provider then can use that strategy they want. So that's definitely a really important thing to us. The second thing is the insurance fund. So right now, I believe we have like 3.5 million in the insurance fund right now. So,
Bobby Ong [00:31:01]:
Yenwen Feng [00:31:05]:
I mean, it depends. So if you look at the chart, it's actually goes up and down. I mean, it really doesn't really have a pattern. The reason behind this is that we talk about the virtual AMM and is not the counterparty to the traders. So it doesn't have market risks, but it did participate in the funding payment. So funding payment is a mechanism that try to maintain the perpetual contract align, kind of a pegged to the underlying assets part. So we follow how FTX, I mean, it's like their funding payment. So we do the funding payment per hour. So we take a look at margin buys and also the index buys, you know, find that difference and then long has to be short or short has to be long. But all platform at any given time, we actually have an equal amount of shorts position and long position. So for example, we might have like a 1000 long position, but only like 300 short position. So at this time the insurance fund will have like make up those a hundred short. So you will participate in the funding payment. So you might pay out or you might receive funding payment. That's how you will sell. So I think if the market is kind of a stable right now, I mean, it doesn't really fluctuate a lot, actually I think the insurance fund can go up stably, but once the market fluctuate a lot, you actually might have risk paying off. So that's actually the major reason that we want to have this new V2 design. We actually try lots of different ways to decide try to avoid is problem, but I think the, you know, trying to combine with Uni V3 is the best solution we have. This week I talked about it doesn't really, I mean, it's not really big issue right now for the V1 protocol. But if you think that if these price actually shoot up to 10X, then it will become a problem. So we want to prevent that.
Okay. So back to the question, the Stage 1, we actually try to redirect all the fees to insurance fund and then try to make a, I mean, accumulate more of this. So, I mean we are in the step right now, and for Step 2 because, I mean, like we don't really have a good kind of [inaudible], I mean, the, the inflow and outflow of the insurance fund. So we will probably start with a smaller amount, maybe like 10% first and then kind of like bumping up a little bit like 10%, 20%, 30%, and then see if the insurance fund can be maintained. Yep. So that's yup, that's what our plan is.
Bobby Ong [00:33:42]:
Cool. What do you say will be, I mean, we've already running up to the last question or so of today's podcast, but what do you think will be like some of the upcoming plans for Perpetual Protocol in the second half of the year?
Yenwen Feng [00:33:54]:
Yeah, that's a good question. So definitely working on V2. We've been like working on this for some time and then trying to implement every. So we, I think for V2, we talk about that we want to swap out the xyk and then use Uni V3, that's definitely one thing. And then we also want to implement other things like cross margin. So we don't have cross margin, right now. I think cross margin is very important to us.
Bobby Ong [00:34:19]:
Cross margin? What's that?
Yenwen Feng [00:34:20]:
Cross margin? Oh, Yeah. So right now, Perpetual Protocol runs on isolated margin.
Bobby Ong [00:34:26]:
Yenwen Feng [00:34:26]:
Which means that if you want to like, I want to trade ETH, so I will put in collateral and then I calculate the margin ratio based on that market only. So if I earn money on ETH market but I lost some money on the UNI market, I mean you know, the calculation is separated.
Bobby Ong [00:34:43]:
Yenwen Feng [00:34:44]:
So you still need to put in more collateral in the UNI market, but the cross margin is like you kind of combined all the market together. So, yup.
Bobby Ong [00:34:54]:
So it's like isolated versus cross margin across all your positions in Perpetual. Okay.
Yenwen Feng [00:34:59]:
Yes. So we don't have that. Definitely want to have that. We want to like FTX, they, right now we only take USDC but in the future, want to take other collateral maybe ETH or maybe other stablecoin. So that's definitely something we want to do as well. So I mean this more from the trader side. We want to have features on par with like centralized exchange like FTX. I think FTX has done a really great job. So we want to have, I mean, the feature there as well. Yeah, the other thing is that the, we have this like new features that we want people. So right now, all the market on Perpetual Protocol, we round to the governance that we create [inaudible]. Like, we want to create a market for 1inch token. So we will have a vote. But in V2, we also want to create this conventional market creation. So like you can deposit, yeah, you deposit something in the insurance fund, also becomes a liquidity provider at certain level. Then you can create the market you want. So it's more like just a little bit complex, then Uniswap. Like on Uniswap you can create any market but for us because it's leverage, so someone need to provide something for insurance fund. But once that's passed, then anyone can create their market. So I think that's also a big milestone for us.
Bobby Ong [00:36:22]:
Cool. So I think, yeah, I want to ask this question earlier, but I kind of forgot it. Do you think a decentralized derivative platforms like Perpetual Protocol and maybe some of your competitors as whole, this category, can compete and be better and have more trading volume compared to a centralized derivatives platform like BitMEX, Binance Futures, FTX. I mean, you've seen it like Uniswap, SushiSwap doing more volumes than Coinbase for example, on certain days. But do you think this will also happen in the decentralized derivative sector?
Yenwen Feng [00:36:53]:
Yes. I certainly believe that's actually why I'm working on this, right. I mean, like maybe one or two years ago is very hard, but with all the Layer 2 solutions coming up, I think. I mean, so we have like this usability. Usually we have this performance issue. We have like, you know, mechanism issue. I think performance at least, I think it will be fixed in the near future. And the mechanism wise, actually, like I said, we, you know, not only us, like other, like all the competitors, they're working on different things. They'll try to bring the features on par with like centralized exchange. So I think that will be solved in the near future as well. So UX, I think it's still hard to kind of like make sure your money is safe. I mean, you have to guard your money on your own. I think that's still hard, that's not a quick fix. But I do believe that in the near future, they will be like someone come out with like a better solution to private key management or something like that. But you know, these three issues, I think we can definitely solve it. And it's more efficient than the centralized solution.
Bobby Ong [00:38:01]:
Cool. Cool. Yeah. I, I certainly hope, I mean, I'm a big proponent of DeFi, I certainly hope that everything decentralized will take over the centralized platform. So just like how we saw Uniswap and SushiSwap getting more trading volume over Coinbase, I certainly hope like decentralized derivative will grow as well and Perpetual and one of your other competitor maybe, hopefully Perpetual, I suppose, will kind of grow and beat the centralized providers. So yeah. I think that kinds of wrap up our time for today. I would like to say thank you very much for taking the time to answer my questions on Perpetual today. And, it's very interesting to hear from you. Very insightful.
Yenwen Feng [00:38:37]:
Yeah. Thanks Bobby and thanks for inviting me. Yeah, I think that the DeFi definitely will go, I mean I think it's kind of like you know, go [inaudible], but I do believe with Layer 2, I think Uniswap can actually get that 10X if you think about it.
Bobby Ong [00:38:53]:
Cool stuff, man. Yeah, looking forward and let's see how things go. Thank you very much.
Yenwen Feng [00:38:57]:
Cool, cool. Yeah. Take care. Thanks.
Bobby Ong [00:39:01]:
All right. That wraps up the show. Thank you for listening to the CoinGecko podcast with Bobby. If you like our show and want to know more, check out podcast.coingecko.com or please leave us a review on iTunes. If you have any feedback do drop us an email at firstname.lastname@example.org. Join us for more next week. See ya!
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